Separatism in Europe: A Lose-Lose Situation?What economic consequences do we have to fear?

23 November 2017

Rob Shenk @ flickr.com

The number of separatist movements is increasing throughout Europe. Not only in Catalonia do many people want to secede. Scotland, Flanders, Corsica and even Bavaria are other examples. From an economic point of view, secession would be loss-making business for all of Europe, but above all for the regions that secede.

Less trade – less prosperity

It is difficult to quantify the exact economic impact of a regional secession. The effects depend largely on how the economic relations are arranged between the seceding region and the rest of the world. What these relations should look like is unclear.

But one thing is clear: initially the region will lose its EU membership and thus its access to the European Single Market. This will hurt the prosperity of the region in many ways:

Exclusion from the Single Market will make exports to the rest of the EU more difficult and weaken businesses in the region. This also means that companies will probably no longer be able to participate in government contracts from the original country and the EU.

Furthermore, imports from the EU will become more expensive. That is bad for consumers because their purchasing power will decline:

Even more important: All intermediate goods that companies in the region must import will become more expensive. This will reduce the competitiveness of companies. The result will be higher unemployment and lower income.

The weakening of competitiveness makes it less attractive for international investors to continue doing business in the region. As a result, capital flows out of the region and production is relocated. Consequently, the region loses jobs.

Increasing uncertainty also weakens growth

There are additional disadvantages for a region that now has the euro:

The region would have to introduce its own currency. This will lead to additional costs: exchange fees, costs of hedging exchange rate volatility, less price transparency. Companies’ competitiveness will also fall further as a result.

The region would no longer enjoy the protection of the European Central Bank or the protection of the European Stability Mechanism. This should increase the borrowing costs of the new country and domestic companies. The higher cost of capital will reduce companies’ international competitiveness.

All in all, uncertainty about future economic development will increase for a region seceding from a country. This will scare investors away, and falling investment means less growth and less competitiveness.

Source: Author’s own diagram

Economic advantages are marginal

These economic disadvantages are offset by only one advantage: The region no longer has to make any financial contributions to the central government. The funds saved can be used for investments in the region. However, it is very doubtful whether this advantage is capable of balancing out the aforesaid disadvantages.

Uncertainty in restructuring relations with the rest of the world

The long-term economic impact will depend on the restructuring of the region’s relations with its original country, the EU and the rest of the world. It is unclear how these relations will be governed:

In the best case scenario for the region, it will be able to become a member of the EU. However, this procedure would take years, even under favorable conditions. The price for this would be, among other things, payments to the EU budget.

If EU membership fails due to the veto of other EU states, the region could conclude a free trade agreement with the EU and other countries. However, these negotiations would take years as well. And there is no guarantee that all trade barriers will be eliminated.

If the EU wants to make an example of breakaway regions and does not grant the region any trade facilitations, the economic isolation associated with this would lead to significant declines in growth and employment.

Separatism – losses for everyone

All in all, separatist movements in individual regions should hurt both the affected regions and the rest of the world. Our previous calculations – both on Brexit and on a protectionist course adopted by the United States – suggest that a region isolating itself economically will suffer the greatest economic losses.

Separatism does not pay off economically.

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